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Frustrating Employment Contracts

20 June 2011

A farmer was faced with an awful situation - his four year old son told him and his wife that their farm worker had indecently assaulted him[i]. The farmer had worked closely with the worker - they shared lunch together, they played sport together regularly and on occasions they had shared a beer after work. The farmer had given the worker accommodation in a sleep-out 20 metres from the family home.

After taking advice from their solicitor and a friend, the farmer and the friend went to the worker’s sleep-out late at night and confronted the worker about the boy’s allegations. The worker denied the allegations. The farmer gave the worker a cheque for a week’s wages and told him he would have to pack his bags and leave immediately.

The police interviewed the boy, but he did not repeat the allegations. The police also conducted a DNA analysis that did not support the boy’s allegations. The police concluded their enquiries without bringing any charges against the worker.

It became widely known in the area that the worker had been accused of indecent assault on the boy. The worker was subjected to verbal abuse, he was assaulted and his car was damaged.

The Worker's Personal Grievance

The worker raised a personal grievance with the Employment Relations Authority alleging he had been unjustifiably dismissed. The Authority decided the matter in favour of the worker and ordered the farmer to pay the worker nearly $20,000 - for lost remuneration, holiday pay, humiliation, loss of dignity and injury to feelings.

The Farmer's Appeal

The farmer appealed to the Employment Court. The Employment Court judge accepted the evidence of the farmer and his wife that the immediate effect of the allegations made it intolerable for the farmer and his wife to have the worker on the farm. Regardless of the outcome of the police investigation, they could never trust the worker or have him back on the farm again. The Judge decided that the employment contract was frustrated once the farmer’s son made his allegation of indecent assault. This meant that the worker was not unjustifiably dismissed.

Frustrated Contracts Under the Law

Frustration of a contract may occur when there is such a change of circumstances that the performance of the agreement is either impossible, or radically different from what was originally anticipated.

Contracts have been frustrated by extreme delay, changes in the law and destruction of the subject matter. For example, a contract to wallpaper a house was frustrated when the house was destroyed by fire.

A party to a contract cannot claim it is frustrated where it cannot be performed as a result of that party’s actions. For example, a contract to employ a farm manager was not frustrated when the employer failed to complete the purchase of a farm because he could not raise the necessary finance.

If a contract is found to be “frustrated” under the law, it comes to an end and neither party has any further liability under it.

The Worker Takes the Matter to a High Court

After the Employment Court decided that the employment contract was frustrated, the worker appealed to a higher court - the Court of Appeal. The Court of Appeal found that there had been no frustration of the employment contract and therefore the worker was entitled to bring a personal grievance action against the farmer. The Judge in the Court of Appeal said that, even though the farmer and his wife were left in a very difficult situation, what had occurred was not beyond the scope of the contract. The worker was entitled to the benefit of the fair procedures allowed to a worker under the law before the worker could be dismissed.

The Court of Appeal said that the doctrine of frustration must be kept within very narrow limits and should not be used lightly because of its drastic effect on vulnerable employees.

Having decided that the employment contract was not frustrated, the question of whether there had been an unfair dismissal has to be determined. The case has therefore been sent back to the Christchurch Employment Court for that court to decide whether it was fair and reasonable for the farmer to have dismissed the worker in these circumstances. As there have been delays due to the earthquake, the Court has not yet made a decision as to whether the dismissal was justified or not.

Dealing With Alleged Misconduct

Getting the best result when faced with an employee’s misconduct is not only a matter of being sure the misconduct has occurred. An employer must follow fair and proper procedures before dismissing an employee. It remains to be seen whether the farmer in this case may have been justified in dismissing the worker. However, as many an employer has found, failure to follow the correct process can have expensive consequences. Specialist legal advice is invaluable.

[i] A Farmer v A Worker [2010] NZCA 547

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.

Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.